Why Value, and Why Now?

After nearly a decade of outperformance for growth stocks, fueled by low inflation and near-zero interest rates, value stocks staged a comeback in 2022, outperforming by 20%.

Nearly halfway through 2023, growth leads value by more than 15% with the tech-heavy Nasdaq Stock Market up nearly 20%.

Why should investors maintain and possibly increase exposure to value?

Top Five Reasons for 'Why Value Now'

1. Higher inflation and interest rates.

The days of low inflation — almost deflation — and zero interest-rate policy (ZIRP) are likely finished. Why?

• COVID-19 stimulus amounted to nearly 30% of GDP, which is the largest amount since the New Deal during the Great Depression. This surge in money supply will likely keep inflation persistently high for years to come.

• Labor shortages will likely keep wage inflation high as the emerging trend of companies bringing their supply chains back to the U.S. (aka reshoring) continues to create jobs.

• The housing market will likely remain tight because of a lack of supply and demographic trends like millennials buying houses at an accelerating rate. Housing-related categories account for more than 40% of the CPI, which will likely keep inflation well above the Fed’s target of 2%.

• Value has historically outperformed growth during periods of higher inflation and higher interest rates.
  
  

2. Attractive valuations.

• Value stocks are trading below historical valuation levels while large growth stocks are more than 20% above average.

• The spread between value and growth remains near 20-year highs.

• Valuation should never be “the” thesis, but it is an important starting point, especially heading into a potential recession.

Figure 1 | Value Stocks Are Trading Below Historical Levels

3. Dividends.

• Over the last 80 years, dividends have represented 35% of total returns from the S&P 500.

• In decades of lower price returns, like the 1970s as inflation and interest rates surged, or the 2000s after the tech bubble burst, dividends were key by offsetting weakness and protecting principal when price returns were negative.

• Higher cost of capital may diminish price returns going forward, so safe and sustainable dividend income will be vital to achieving consistent returns.

Figure 2 | Dividends Have Represented a Large Portion of Total Returns

S&P 500: Dividends' Contributions to Total Return by Decade

4. Defense wins championships.

• Downside protection is key to safeguarding and building wealth over time.

• A 10% loss requires an 11% gain to break even. A 50% loss requires a 100% gain to break even.

• Value provides more than double the exposure to sectors that can provide downside protection, and dividends, in recessionary markets like consumer staples and utilities.

• There is no shortage of risks in today’s markets. Interest rate hikes and quantitative tightening, the likes of which markets have not seen in more than 40 years, created unintended consequences, including the regional bank crisis and the cryptocurrency meltdown.

• Geopolitical risks persist, including the Russia-Ukraine war, tension between China and Taiwan and an increasingly unstable Middle East.

• American Century sees a 70% probability of a recession and a 25% chance of stagflation over the next six months. Defense via downside protection and lower volatility will likely be critical components to successfully navigating these challenging environments.
  
  

5. History and academic research.

• Nobel prize-winning research from Eugene Fama and Kenneth French proved that over time, value stocks outperform and create more wealth than growth.¹

• Over the last 20 years, even including the decade of growth’s dominance, high-quality value has been the style with the highest returns and the lowest risk.²

• Empirical evidence shows that during both recession and stagflation — a combined 95% probability over the next six months, according to American Century — quality is one of the best-performing factors in both growth and value.³

Figure 3 | High-Quality Value Has Outperformed With Lower Risk

^{Data from 1/31/2002 to 12/31/2022. Past performance is no guarantee of future results. Universe: MSCI World Index.
Source: American Century Investments, FactSet.}